Starve The Army Of Hungry Money Managers

Hide your cash!  The money managers are coming.  There’s a huge lusty hungry army of financial advisers marauding about looking to latch on to your early retirement war chest and clandestinely drain it’s lifeblood while telling you it’ll all be okay and you’re in good hands.

Of course the conquerors will try to pacify you with soothing words!  Of course they will try to take away any worries of losing money.  How else could they justify outsized fees?  How else can they scare you away from low cost DIY investing?

The truth is that you can manage your own investments and do better than the professionals (after fees) as long as you keep the long game in mind.  Investing isn’t full of secrets that only seasoned professionals know.  There are plenty of different ways of investing on your own, but here’s the way I do it:

Invest in an adequately diversified portfolio of low cost passive investments and hold for the long term.

That’s it.  No secrets.  No fancy sales words, charts, or graphs to persuade you to fork over a few percent of your investments to me every year (unless you’re feeling generous!).

I have a fairly complicated asset allocation that includes ten different asset classes, but you can do well with just one fund (like the Vanguard Lifestrategy Growth Fund VASGX).  Or if you want to feel like you’re a real investor, two or three funds like Vanguard Total Stock Market ETF (VTI) plus Vanguard Total International Stock ETF (VXUS), plus Vanguard Total Bond Market ETF (BND).


Appetite for risk

The biggest challenge in investing is determining your risk tolerance.  To get more specific, how comfortable are you risking the loss of money in order to achieve higher returns long term?  More appetite for risk equals a larger proportion of equities in your portfolio.  Inversely, less appetite for risk equals a smaller serving of equities and a larger serving of less volatile fixed income investments like stocks or bonds.

My investment company of choice, Vanguard, can help you out.  They have an online Investor Questionnaire that does a great job of making you spill all your secrets and share your fears of losing money in the market while also figuring out other important financial considerations that impact your risk tolerance and ideal asset allocation.  All in eleven questions.  Give it a shot.  Or if you want a customized recommendation of funds based on your risk tolerance, check out their Fund Recommendations questionnaire.

I plugged in my current situation as an early retiree starting to pull from investments soon and received a suggestion to invest in 70% stocks and 30% bonds.  I’ve decided to get way more aggressive and hold almost 100% stocks with the exception of one to two year’s expenses in cash.  I do this knowing that holding more stocks increases my risk of volatility year to year.  In the long term, I expect to make about a percent higher return each year by holding more stocks.

If you’re curious about how different mixes of stocks and bonds have performed historically, Vanguard has that info too.  I can see that a mix of 70% stocks/30% bonds generated a 9.2% return on average versus a 10.2% return for 100% stocks.  How often did these two portfolios lose money?  The 70% stock portfolio lost money in 22 out of 88 years they studied compared to losses in 25 out of 88 years for a 100% stock portfolio.  And losses were steeper with the all stock portfolio.

In exchange for more volatility, I’m banking on the 1% higher returns generating me a 17 fold increase in my portfolio over 30 years instead of “only” a 13 fold increase if I were to choose a 70% stock allocation.  This is my personal appetite for risk, and if you aren’t one to take calculated risks, don’t get too aggressive.


You aren’t alone

Some folks take pride in how awesome their financial adviser is.  They hold the adviser up like it’s some badge of honor, some tangible proof that they have arrived.  That they are successful enough to need to employ a paid professional adviser (to manage all their thousands of dollars!).

It’s really not necessary since plenty of wealthy individuals with million dollar portfolios manage to make great returns without a paid adviser.  You just don’t see them boasting around the water cooler about how awesome their financial adviser is because they already retired early.  That’s what saving hundreds of thousands of dollars in fees over a lifetime can do for you, too.

There are tons of online groups that are fans of low cost investing.  The Bogleheads (40,000+ members), the Early Retirement Forum (27,000+ members), and the Mr. Money Mustache Forum (14,000+ members) to name a few groups.  There are tens of thousands of people just in those three forums, virtually none of whom have MBA’s or professional training as financial advisers.  They did a little research and legwork and figured out they can reach financial independence a lot sooner if they take care of their own investments and keep for themselves the 1-2% fees most advisers take.  To be fair, not all the members manage their own investments, but the great majority do.


Resources to help you invest on your own

The forums I mentioned are great tools.  But if you want to get a solid foundation in investing and how the stock market works, I’ll suggest a few books that taught me a lot.  The Boglehead’s Guide to Investing.  A Random Walk Down Wall Street by Burton Malkiel.  The Four Pillars of Investing by William Bernstein.  The Bogleheads book is a perfect introduction to DIY investing, and the other books provide more depth to investing and how the stock market works.

Once you start investing on your own, you’ll want to track your investments.  The best online tool I know of (that also happens to be free!) is Personal Capital (review here).

Let Personal Capital track your asset allocation for you!
Let Personal Capital track your asset allocation for you!

Even though a simple approach of just a few funds is perfectly adequate, you often end up with more funds than that if you have more than one investment account.  By the time you add in a his and hers 401k and a set of IRAs plus possibly a health savings account, you might have more than a dozen funds and need some way to keep track of the resulting jumble.  I personally use a spreadsheet that is fed by the aggregated investment tracking from Personal Capital.

If you really can’t invest on your own and have to have a financial adviser, make sure it’s a fee only adviser.  The best place to find one is NAPFA, the National Association of Professional Financial Advisors.  All members are fee only advisors and will put your interests before their own.  They don’t work on commission, instead relying on a fee you pay them for their services.  Vanguard also has financial advisers for a very reasonable fee (who also don’t work on commission).


Online money managers

There are online investment services that will manage your money for you for a low to moderate fee that is usually a fraction of a full service brokerage firm.  Personal Capital will manage your money for under 1% (with minimum accounts of 100,000).  Another option with even lower fees than Personal Capital is Betterment.  For 0.15% to 0.35% (depending on how much you invest with them), they will automatically invest any amount of your funds (even as little as $100) into a globally diversified investment portfolio that would look pretty similar to my own portfolio.  They use mostly Vanguard ETFs which means rock bottom fees for the investments themselves.  At $150 in annual fees for a $100,000 portfolio, it isn’t a horrible deal if you don’t want to deal with learning about investing on your own or want to let someone else manage a portion of your funds.

But you’ll be best off if you learn to invest on your own.  For a moderate investment in time, you’ll save on investment fees and have more personalized control over your investments.  Even a 0.15% management fee adds $1,500 in investment expenses to a $1 million portfolio.  That’s a lot of money to pay someone else.



Do you have a financial adviser or are you a DIY investor?  I’m guessing most readers manage their own money!  



photo courtesy of flickr / Ken Eden

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  1. Like yourself, I very strongly come down on the side of everyone making their own investment decisions, at the lowest cost possible. There is an old adage that people spend more time planning a vacation than they do on their portfolio/life’s savings. For most people that I have talked to I believe that is true. As for myself I have always educated myself, made my own decisions, and lived with the results (in our case being early retirement as you did, so we must have done something right.

    While I am partial to Vanguard, one can find low-cost providers for a number of fund offerings. If your preference is individual stocks there are many choices there as well among companies that offer platforms to do that. And definitely do not fall for the antics of insurance companies and others regarding annuities! You can structure your own annuity consisting of a single index fund and a ladder of CDs without ever paying exorbitant fees, or give up control of your assets completely, just for some company to do exactly what I just posited. The bottom line is that if you are unwilling to do the work yourself, then you deserve to be fleeced by those willing to take your hard-earned money.

    I could go on and on but I look forward to seeing others comments in this area. Keep up the great work!

    1. I guess we did do something right! 🙂

      Your tip on the index fund and CD ladder to “roll your own” annuity is a good one. Skip the insurance company and you’ll come out way ahead in exchange for what amounts to a few hours of bookkeeping up front and very little after than (other than transferring your money between accounts!).

  2. I couldn’t agree more with you. I have always managed my own finances and in the past year, have read more than 40 finance related books to educate myself on their various financial instruments. My portfolio consists of cash and fixed income, rental real estate, mutual funds and dividend paying stocks. Like you, I am a big fan of Vanguard and have most of my mutual funds in their low cost index funds.

    Thanks for this very informative post although I suspect that many who regularly read your blog are financially savvy investors who manage their own finances.

    1. Sounds like you’re on the right path already! Congrats!

      “Thanks for this very informative post although I suspect that many who regularly read your blog are financially savvy investors who manage their own finances.” You’re probably right and I almost didn’t write the post because it’s such a very simple concept to the people who “get” it. But I wrote it anyway, and hope everyone can share it with friends, neighbors, or coworkers who haven’t learned the lesson of how dangerous paying high fees can be. And maybe some people from Google will land here if they are wondering whether self-managed investments are better than paying an adviser.

  3. Right on! Vanguard’s founder Jack Bogle got it right–low fee, broad based index funds are the way to go. Retail investors have been robbed by Wall Street’s active fund managers, none of whom has or can produce long-term returns, after fees, in excess of index investing. You’re right–investing is easy, especially if you turn off CNBC and tune out the Wall Street marketing drumbeat.

  4. I work in health care. A few years ago a mathematician showed that it was possible that SOME rather ineffective quackery treatments manage to persist in society just because they are ineffective. The fact that they’re ineffective means that the people using that treatment will stay sick for longer, other people will see that they’re ill and the sick people will tell them what they’re doing to “cure” their sickness, and then other people will pick up that treatment even though it’s not effective. Meanwhile, the people who used an effective cure aren’t ill anymore, have moved on to other things in their life, and don’t bother telling others what cured them, because the illness is already long forgotten.

    Your description of using “financial advisors” as a cure for “not investing” could be seen in a similar way, as you already state: the people who haven’t gotten rich yet tell other people who haven’t gotten rich yet how to cure being poor; while the people who truly became wealthy due to investing in a smart way have moved on and are doing other things with their time.


    1. To the layperson, my method of investing doesn’t make sense against a background of noise from CNBC and stacks of money magazines and guys promising to give you (and only you!) the secret tips to investing in the stock market. How can simplicity really win out (on average) against very active management with a highly paid adviser? I mean the guys wear nice suits and drive fancy BMW’s so they must be successful at investing other peoples’ money, right? 😉

  5. It is important to be diversified, build the portfolio slowly over time, keep tabs on investment costs (including taxes) and know what you own and why you own it.

    I agree that investors are the ones who truly care about achieving their own goals; an expensive financial advisor selling loaded mutual funds with high fees or annuities is an obstacle.

    I also like your high equity allocation. Given the fact that you will need to be retired for 50 – 60 years, it makes perfect sense. Plus, it seems like you can live entirely off the dividends generated by your portfolio already ( and potentially sell very little)

    1. Yes, we are right at the point of being able to live off of dividends alone (at least for basic living expenses) and just sell a bit to cover discretionary spending. Which is why high equities allocation makes sense for very early retirees.

  6. Thanks for the book recommendations. We are skewed towards residential real estate right now (about 1/3 of our net worth in 2 paid for rental properties). Its our asset allocation due to the fact that Raleigh is undervalued and the fact that I have a hard time wrapping my head around everything stock related. All our retirement funds are in mutual funds that had a low buying cost through capital one 360. With a roaring stock market (since I’ve started investing), I look like a financial wizard, but I’ve only outperformed the market by 1-2 points, so I should probably review my asset allocation.

    1. You stated you admittedly were somewhat new to the market and investing, but then hinted you were unhappy you were only beating the market by 1-2% points. Not sure which market benchmark you are using, but you sound like you are doing better than many of the money managers out there that oftentimes do nothing more than match the market at best. Congratulations.

    2. Like ChuckY stated, 1-2% outperformance is pretty good, depending on what benchmark indexes you are using. Maybe your asset allocation is perfectly fine! 🙂 Always good to take a look at it though. The rental real estate is a great option, especially in places like Raleigh that still offer a high rent to purchase price ratio. I don’t personally own rental real estate, but if I was trying to build up net worth quickly, I’d probably go that route today for at least a portion of the NW.

  7. After hearing so many bloggers sing the praises of Personal Capital, we just signed up for an account. I did the initial interview for one of their advisers to get to know us and our strategy. The follow up call for their recommendations is tomorrow. From the sounds of it, you do not use their investment advising. Am I correct? We are perfectly content with our aggressive Vanguard holdings. I wondered if there is any benefit to following the PC suggestions or to just stick with Vanguard. Thanks for the advice!

    1. I did the Personal capital investment adviser consultation and they recommended roughly what I already have (with a bit less international and a bit more domestic equities). They also have a decent asset allocation tool online that compares your existing portfolio with their recommended portfolio, so you can see how close you come to the recommendation and whether you are investing optimally (in terms of risk and expected return).

      I didn’t sign up for their paid advisory services. The advice seemed great, but since I already have the investing side figured out, I didn’t want to pay the fee. For advisers, the Betterment solution seems to be the sweet spot between good asset allocation and management and low fees. They just don’t appear to hold your hand and provide personalized advice (other than different risk based allocation models).

  8. I think there are lots of people with MBAs on the forums you mentioned (myself included), but I am not arguing your point. I read more about Betterment on the Mad Fientist’s blog, but haven’t checked it out yet. With regards to the online forums, I like to see the different opinions, it makes me think about my views (and sometimes change them).

    I think people should at least be involved enough to ask good questions about their investments and also be able to determine their financial goals (early retirement, travel, etc). If they are not comfortable, at least find a fee only advisor. I would hope some of these resources would make it easier to lower fees and end up with a larger nest egg!

    1. Maybe I’m overselling the “virtually none have MBA’s”. 🙂 I’d say the proportion is pretty small, maybe 5-10% at most? Although there are a decent amount of finance and management types so maybe I’m guessing low. The great majority don’t have MBA’s or financial adviser training, yet manage to do just fine running their own investment portfolio. And even for those that do have MBA’s, many wouldn’t have had more than a class or two on investment management if they were in real estate, healthcare, HR, marketing, etc.

  9. One thing I’ve noticed is that people tend to buy high and sell low. I’ve seen this dozens of times. “Oh my! The stock market is down and I’ve lost 100K. I’m selling and buying 1% CDs before I loose it all”

    Seems people do this more often than not. A great buying opportunity for us usually means someone is losing big time.

    Any advice to keep people on course?

    I think that is a role financial advisors play. When I was working in a brokers office and the market was going down clients would call like crazy and the broker would simply say — “I’ve been through this many times and it will be o.k.”

    1. Sounds like you were at a great brokerage firm then! I have no stats, but I’ve seen plenty of people with highly compensated financial advisers who sell when it’s low and buy when it’s high. From a broker’s perspective, you typically make more money when you churn (loads, fees, or commissions). Everybody selling, clients scared? Tell them to sell those dirty stocks and buy some bond funds! Everybody cheering and clapping the bull market along? Time to ditch those bonds and buy some more stocks! Fear and greed are the most persuasive sales tools in the broker’s pocket.

      I’m not saying all financial advisers are like this, or that even the majority are, but I’ve heard about enough that do this to know it’s a “thing” unfortunately. But you’re right, one of the roles they *should* play is as a level-headed voice of reason saying “no, really, it’s not different this time. Just stay the course and stick with your long term asset allocation”.

      As for advice to stay the course, I’d suggest learning about the history of the markets (the Boglehead’s Guide linked above is a good one). Look at crashes in 1987, 1998, 2001-2002, 2007-2009, and even further back to 1929-1933 Great Depression. Those kind of events may repeat over the next century.

      The second step to staying the course in a down market is starting with a proper asset allocation based on the individual’s risk tolerance. If you aren’t okay “losing” 20-30% in a single year on stocks, don’t go 100% stocks. If you aren’t okay losing more than 5-10% in a given year, you might not want more than 25% stocks. Your long term returns will be lower with a low equities %, but not as bad as if you go 100% stocks while the market is up and then sell once it’s down and then wait and buy to 100% stocks after it goes up again.

      1. Good points my friend — Edwards Jones was my primary brokerage firm. In my office we asked people to sell when stocks were flying and buy bonds then.

        The average mutual fund holder at Jones stayed the course for 13 years and many much longer than that.

        Churning is very common in the brokerage industry even at Jones.

        We did have a nice self made diversified portfolio of super low fee funds at another brokerage I was at.

        We put together a very low beta portfolio with a history of never losing more than 10% in a year but averaging 10.5% historic return. For this we charged a fat 2%. So the consumer ultimately got an 8.5% with very low volatility while having a professional hand holder. It was hard to keep them happy when the market was getting 30% and they were getting 18%.

        I’m sure you and I can beat 8.5% but for 98% of the population this is difficult and they are very unlikely to stay the course.

        I haven’t seen you discuss beta? Do you use that with your diversified portfolio decision making matrix?

  10. Good information Justin. Kind of like you use a “do as I say, not as I do” approach.

    The long term return of a 70/30 vs a 100/0 portfolio are not that far off. Your highs are higher and your lows are lower and you might eek out another 1%.

    I love the quote “take no more risk than you have to”. Mr. 1500 Days has a boat load of Apple and Facebook. That high concentration is a recipe for disaster. Even with “great” companies like Apple and Facebook.

    At 43, we are 65/35. I could assume more risk, but we don’t have to.

    Our investments are in 3 index funds. Total US, Total International and Total Bond. The one exception is I use a Intermediate-Term Tax Exempt Bond fund in our Taxable account. International is 20% (or less) of our stock allocation.

    I would hate to see your stock portfolio drop 50% and send you back to the work force. I know that is somewhat unlikely. Another 2008 surely couldn’t happen so soon could it? If I knew that I’d be rich..ha ha.

    Even 10% in bonds would calm the waters a bit.

    Good information and good luck! I hope this recent hiccup in the markets is a blip. Low oil prices could be very interesting for the near term.

  11. It’s nice to hear others that have gone it alone to manage their investments with success. We have just recently taken our money from an advisor to Vanguard. We’ll see how it goes…fingers crossed!

    Our experience was that the advisor was helpful at the beginning of our marriage. I was much more comfortable with risk, my wife not at all. So he got us to a middle ground. Also helped with non-investing advice: insurance, wills, etc. But ultimately as we matured, we decided to do it ourselves.

    Also, I agree with your book lists, those were all excellent. Another I would recommend of William Bernstein’s is the Intelligent Asset Allocator. It was very helpful to me in understanding the risk/reward info on diversifying.

    1. The Intelligent Asset Allocator is another great one. That’s probably a good third or fourth book to read on investments once you get comfortable with the basics. That plus Four Pillars and the Bogleheads book are the three main books I read to figure out “how to invest for the long term”.

  12. I agree with you, mostly. I do everything DIY for money management, however, people like my mom and my husband, it does not seem to click in their heads. I don’t know why. Both can be frugal, but managing the accumulation from that frugalness does not seem to happen. So, I run both my husband and I’s finances and my mother’s. I also help a few friends out now and then (help them set up accounts, give info etc). I wish there was a personal finance not advisor but aid. Someone you pay per hour to get feedback. Keep your money with fidelity/vanguard etc, but someone to help. Some people are not comfortable getting help on the money boards and want an in person discussion. Might be a fun thing to do when retired, set up a cheap “money help day” once a year.

    1. I end up giving out tons of free advice throughout the year. It’s my form of volunteerism. Occasionally I get paid in kind, but I don’t really expect that.

  13. I would love to pull my assets out of the greedy hands of money managers in our taxable account. Besides getting hit with the 5% front load and dealing with the higher ER .5-1.05%, if I were to liquidate now – capital gains.

    Hopefully we will be able to get down to the 15% bracket, liquidate, and not have to pay the tax on the capital gains. Great info here!

    1. Ouch! Yeah, locked in cap gains can paralyze you from being able to make the best immediate choice for your investments. We had some funds in B shares of a mutual fund within an IRA many years ago (before learning about Vanguard!) and we just paid up the 3-4% contingent sales fees. It was only on $10k or so, so not huge money. And no cap gains of course in an IRA.

      The best you can do is have all divs and cap gains distributions paid to cash and pull those puppies out as they pay out. And divert all new money to low cost investments elsewhere. I would definitely run the numbers to make sure the tax hit isn’t worth it though.

  14. This is an awesome post! It’s something that I’ve been pondering about doing over the last year or so.
    Like someone else mentioned, when we first got married, our advisor was very helpful in assisting us with getting our life in order (will, life insurance, setting goals, etc..)

    We’ve both been somewhat knowledgeable about investing. And over the past couple of years, I’ve gained even more knowledge and learned about ETFs and Index Mutual Funds.

    Our advisor has never tried to get us to Sell our Stocks high and buy bonds. In fact – he hates bonds. He believes the returns are crap, and why lock your money up for so long to get a crappy return. He’d rather put the money in a money market fund where it’s accessible to you if you need it, and you’ll earn slightly better than a savings account. But at least it’s not tied up.

    But at the same time, over the past year, I’m beginning to wonder if his advice is worth the 1% we’re paying. Our situation is a little complicated as we live in a border investing in both Canada & U.S and the tax implications is a little complicated. He is knowledgeable in this area and has given us advice as to what would be best to do from a tax perspective as well. So at times, I feel that the fee we’re paying is worth it because things like this I would not know.

    But at times, I feel a lot of it I could do on my own. Actually..the majority of the stocks we own…we picked ourselves. The mutual funds we own – he made suggestions, then I did the research on them..and decided which ones we wanted to invest in.

    I don’t mind paying for a service, as long as I’m getting good advice/service in return that is worth it. Like one of the other commenters mentioned, I like to have someone to sound board my investment ideas off of and he provides that to me.

    But this year – I think I’m going to find a fee based advisor to review our portfolio and get a 2nd opinion on it and see if the thoughts I’m having about our portfolio are correct or not.

    I know most people here do not believe/agree with paying financial advisors. But I also believe that they’re not all trying to steal your money. If you can find one who truly is looking out for your interests, that is truly bringing you value, and is open and honest with you about all the fees – then it would be worth paying for.(fee based or not).

    I’m curious – Do you think there is any scenario where it’s worth paying for an advisor Justin?

    1. It may make sense to pay for advice if you can’t handle managing the money yourself, or if you don’t want to spend the time learning about investing and doing it yourself. But if we’re talking thousands of dollars per year in fees (1% of a million = $10,000 for example), that’s some good hourly tax free earnings if you’re managing your investments correctly. It really shouldn’t take more than a few hours per year to manage your investments unless you just love moving stuff around (which might be less than optimal anyway).

      And if you do choose to spend money on investment management fees, you should keep those fees as low as possible. Some companies like betterment or Vanguard that charge in the 0.3% or less range are relatively inexpensive choices for money management (though you’ll get more hand holding and individual attention with Vanguard Personal Advisory services). Even better for large portfolios (quarter million+) would be to pay for hourly advice. It might cost $1000-1500 to get a financial plan and asset allocation set up but shouldn’t be that expensive every year for having your advisor mostly do nothing except manage a passive index fund portfolio. If they are answering tax questions or doing something more complicated then it might make sense to pay more. But for many people, a financial advisor’s fee doesn’t get them any more return however they can make the decisions you can’t or don’t want to make yourself (asset allocation, appropriate fund selection, etc).

  15. I have seen you mention contributions to HSAs a few times and as a fellow NC resident, I am wondering how this is possible. I am also a state employee, as you were. The state offers a pre-tax health savings account, but all funds therein must be spent by end of year or the contributions are lost. Mr. ROG, what am I missing here? Thanks so much for you sharing spirit.

    1. I thought the State had a new kind of health insurance plan where you could contribute to an HSA if you choose the high deductible health plan, or to a Health Reimbursement Arrangement (HRA) if you participate in the consumer directed health plan? Those are new since I quit working so I’m not up to date on options.

      We participated in Mrs. RoG’s employer’s HSA plan and I was covered through her plan. From what I remember, I didn’t sign up for the state’s health insurance at all because it wasn’t as good as Mrs. RoG’s plan and it would have disqualified us from HSA participation for the $6600/yr max (only could do half that).

  16. I mix and match.
    We have used the same advisor for about 5 years. He was really helpful at consolidating all our investments, pensions and savings, recommending investments that we couldn’t get access to directly. Since then, things have moved on and I have found I can get access to the same investments directly, but the platform charges were higher than through him, hence the 1% fee we pay him was effectively swallowed up and more by the beneficial rates he was getting for us.
    At the same time, he is really helpful on tax aspects, and once a year we sit down and review goals, performance etc. So overall, I think it is worthwhile. And to be fair, he waives charges or reduces them, depending on the circumstances. The investments he has recommended have outperformed most of the Vanguard funds, so I am content.
    However I also manage about 20% of our investments directly. My goal is to beat the return the formal investments obtain (including management fees). So far I am enough ahead to keep going. My husband’s ISA goes into the ‘safe’ formal investments, I invest mine myself, so we retain a healthy balance between ‘safe’ and ‘risky’!!

    1. Good to hear it’s working for you. The main thing is understanding the fees you’re paying and finding someone you can trust. Too many times people get taken advantage of because they don’t understand the fee structure and/or they are given a service that’s basically buying an index fund but charged 10x the price without any real value added.

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